Counselors to America’s Small Business
PRICING
STRATEGIES
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Agenda
• What is SCORE?
• Why pricing is important
• Multiple pricing strategies
• Different business types
• Questions/answers
SCORE®-ECI serves the following counties in East Central Iowa:
Benton, Cedar, Linn, Jones, Henry, Iowa, Keokuk, Johnson,
Chickasaw, Bremer, Black Hawk, Buchanan, Henry,
Washington
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What is SCORE?
National, volunteer organization
In partnership with the Small Business
Administration
45 members in East Central Iowa
Help people start / manage a business by:
 Free/confidential, one-on-one counseling
 Workshops, seminars, roundtables
www.scorecr.org
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Factors Affecting Price
• Product or service costs
• Seasonal fluctuations
• Customers’
characteristics
• Customers’ price
sensitivity
• Market forces
• Psychological factors
• Competitors’ prices
• Substitute products
• Sales volume
• Credit terms and
purchase discounts
• Company’s image
• Customers’ expectations
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Three Pricing Forces: Image,
Competition, and Value
Price conveys image
• Prices send signals to customers about
quality and value
• Key is understanding your target customers
When setting prices, business
owners must consider competitors’
prices
• Competitors’ locations
• Nature of the competing goods
• Avoid price wars!
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What determines price?
Price Ceiling ("What will the market bear?")
?
Acceptable
Price
Range
?
?
Final Price (What is the
company's desired "image?")
?
?
?
?
?
?
?
?
?
Price Floor ("What are the company's costs?")
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Three Pricing Forces: Image,
Competition, and Value
(Continued)
Focus on value for your customers
• Objective value vs. perceived value
• Three reference points:
o Price paid in the past
o Prices competitors charge
o Company’s costs
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General Principle – Seek The Highest
Possible Prices
• There is nothing illegal, unethical, or immoral
in seeking the highest price for your offering
that the market will pay
• Start with prices slightly higher than you
think justified – generally it is much easier to
lower prices than to raise them
• The marketplace will tell you if your price is
too high. It will not tell you if your price is
too low.
“Too low prices” is one of the 10 most
common reasons for business failure.
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Price Segmentation
If the market can be divided into high and
low price buyers
and
If you can differentiate your offering to
the different price groups
Price Segmentation will always
produce better results than a single
price strategy
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New Product Pricing
Three types of products:
• Revolutionary products transform an
industry
• Evolutionary products make improvements
to products that are already on the market
• Me-too products are those that allow a
company merely to keep up with competitors
Pricing flexibility exists for each type
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Introducing a New Product
Three Goals:
• Get the product accepted
• Maintain market share as competition
grows
• Earn a profit
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Introducing a New Product
Three Strategies:
Penetration – low initial price to gain market share
Skimming – high initial price to skim profits on a
unique product with little competition
Life cycle pricing – high initial price, decreased
over time as volume efficiencies or technology
reduce costs
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Pricing Established Goods
and Services # 1
• Odd pricing – ending in 5, 7, or 9
• Price lining – good, better, best
• Dynamic pricing – premium price
for those who are willing to pay
• Leader pricing – low price items to
attract more customers
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Pricing Established Goods
and Services #2
• Geographic pricing
o Zone pricing
o Uniform delivered pricing
o F.O.B. seller
• Discounts (or markdowns) - move
stale merchandise
• Multiple pricing – lower prices for volume
buys
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Pricing Established Goods
and Services #3
• Bundling
o Optional product pricing
(autos/sunroof)
o Captive product pricing
(razors/blades)
• Suggested retail prices
• Follow-the-leader pricing – matching
the market leader
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Pricing for Retailers: Markup vs. Margin
Dollar Markup = Retail Price - Cost of Merchandise
Dollar Markup
Percentage (of Retail Price) Margin = Retail Price
Percentage (of Cost) Markup =
Dollar Markup
Cost of Unit
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Example: Markup vs. Margin
Dollar Markup = Retail Price - Cost of Merchandise
Percentage (of Retail Price) Margin =
Percentage (of Cost) Markup =
Dollar Markup
Retail Price
Dollar Markup
Cost of Unit
Example:
Dollar Markup = $25 - $15 = $10
$10
Percentage (of Retail Price) Margin = $25 = 40%
$10 = 67%
Percentage (of Cost) Markup =
$15
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Markup vs. Margin Chart
15% Markup = 13.0% Gross Profit (margin)
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.3% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit
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Pricing for Manufacturers: Cost-Plus
Pricing
Selling Price
Net profit
Fixed costs
Variable costs
(Cost of goods sold)
Profit Margin
Selling and
Administrative Costs
Direct Labor
Direct Materials
Factory Overhead
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Gross Profit Calculation Example
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Profit and Loss Calculation Example
Sales/Revenues
$ 500,000.00
Cost of Goods Sold (Variable Costs)
Gross Profit (Sales – Costs of Goods Sold)
Gross Profit Margin (Percentage)
$ 285,500.00
$ 214,500.00
42.9%
Fixed Costs
Fixed Costs (Percentage)
$164,500.00
32.9%
Net Profit (Gross Profit – Fixed Costs)
Net Profit Margin (Percentage)
$ 50,000.00
10.0%
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Pricing for Service Firms:
Price per Hour
Price per Hour = Total cost per x
1
productive hour
(1 - net profit target as
a % of sales)
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Pricing for Service Firms:
Price per Hour
Price per Hour = Total cost per x
productive hour
1
(1 - net profit target as
a % of sales)
Example: Ned’s TV Repair Shop
Price per Hour = $18.59 per x
1
hour
(1 -.18)
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= $22.68 per
hour
Pricing for Service Firms:
Price per Hour
• Alternatively, start with your desired annual earnings
• Divide by number of productive hours per year
(2050 available work hours per year)
• Answer is the required charge per hour
• Can you be competitive at this rate?
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Summary
• Pricing strategy is a meaningful tool to
use that helps create (or sustain) your
company’s image
• There are multiple variations of pricing
strategy – each company is unique
• SCORE mentors are available to assist
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